Equitable Mortgage Cases - Wisconsin - Part 2

Hunter v. Maanum

78 Wis. 656; 48 N.W. 51

(Wi. 1891)

(revised 8-15-07; 1st & 2nd paragraph corrected 1-17-08 - corrections in red)

This case involved an action of unlawful detainer by a grantee (actually, it was a grantee's successor in interest) under a deed given to secure payment of a debt. As part of the conveyance to the (original) grantee, he and the grantor contemporaneously entered into a separate land contract under which the grantor could buy back the property conveyed upon payment of a certain sum in five equal installments with interest. The grantor made no payments; the grantee conveyed its interest to another - its successor in interest - and the successor thereafter initiated an action of unlawful detainer against grantor to obtain possession of the premises.

After a jury trial, the jury found in favor of the grantor (Editor's Note: the original version of this post inadvertently stated that the jury found in favor of the grantee; correction made 1-17-08) and, on appeal, the Wisconsin Supreme Court affirmed. The ruling was to the effect that (1) the transaction creating the relationship between plaintiff and defendant was an equitable mortgage; and (2) an action of unlawful detainer, under the statutes then in effect, could not be maintained unless the conventional relation of landlord and tenant existed at the time between the plaintiff and the defendant.

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In affirming, the court made the following statements and observations (bold text is my emphasis; excerpts broken up for ease of reading):

1) "The question, therefore, recurs whether the facts so submitted to and found by the jury authorized the maintenance of this action of unlawful detainer."

2) "There is no claim that the facts bring the case within the remedy given by sec. 3359, R. S. The contention is, however, that they do bring the case within the provisions of sec. 3358, R. S. 1 This court has repeatedly held that such an action cannot be maintained under that section unless the conventional relation of landlord and tenant exists at the time between the plaintiff and the defendant. Buel v. Buel, 76 Wis. 413, 45 N.W. 324; Menominee R. L. Co. v. Philbrook, ante, p. 142; and cases cited in the opinions."

3) "Such an action is a summary remedy given by statute, but was never intended as a substitute for ejectment or a bill in equity. "A justice of the peace has no jurisdiction to try the title to land. But the facts upon which the right of removal is based may be put in issue by the answer, and the issue so raised may be tried and determined in a justice's court. . . . Even where the facts show that the defendant has an interest in the premises which can only be fully protected in a court of equity, yet, if they are such as to disprove the conventional relation of landlord and tenant, they will be sufficient to defeat such action of unlawful detainer." 76 Wis. 413, 416, 417."

4) "The question to be determined, therefore, is whether the facts found by the jury in the portion of the charge quoted in the foregoing statement, were such as to create the conventional relation of landlord and tenant between the plaintiff and the defendant."

5) "Such facts were to the effect that the quitclaim deed was given to the plaintiff by the defendant and wife in pursuance of an arrangement and agreement that the defendant should retain an interest in the land with the privilege of selling the same, within the time named, for a price exceeding the amount due on the contract, and, in case of such sale, retain such excess; that, in case the plaintiff should sell during said period for an amount more than his due, then he should turn such excess over to the defendant; that if the defendant paid the amount due on the contract during said period, then the plaintiff should reconvey the land to the defendant."

6) "In accordance with numerous adjudications of this court, we must hold that the agreement thus found left in the defendant an equity of redemption in the land, and of course disproved the conventional relation of landlord and tenant."

7) "A few of these cases only are cited. Starks v. Redfield, 52 Wis. 349, 9 N.W. 168; Rockwell v. Humphrey, 57 Wis. 410, 15 N.W. 394; Schriber v. LeClair, 66 Wis. 579; and cases cited in the opinions."

8) "It is contended, in effect, that the absence from the arrangement of any express personal agreement on the part of the defendant to repay the money barred him of all equity of redemption in the premises. But that fact is not always conclusive, as shown by numerous authorities in the cases cited."

9) "Once a mortgage, always a mortgage, is the rule generally recognized in the cases. Ibid. When the facts and circumstances of the transaction are equivocal, the question whether it constitutes a pledge, security, mortgage, or a conditional sale is one of intention. Ibid. Whenever the relation of debtor and creditor is created by the transaction, or previously existed, and by express language or fair implication continues, and the possession is retained by the grantor, the transaction is usually held to be a pledge, security, or mortgage, especially if the value of the property conveyed is considerably in excess of the price allowed. Ibid."

10) "But the cases cited so fully discuss the questions here involved as to require nothing additional in this opinion. It is enough to say that the facts found negatived the existence of the conventional relation of landlord and tenant between the parties. Buel v. Buel, 76 Wis. 413, 45 N.W. 324; Menomonie R. L. Co. v. Philbrook, ante, p. 142."

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Go here for other posts on the claiming the equitable mortgage doctrine in actions seeking eviction of a homeowner who signed away a deed as collateral for a loan (ie. actions for ejectment, unlawful detainer).

Go here for all posts on the equitable mortgage doctrine in Wisconsin. Wisconsin equitable mortgage zeta emdefense

Equitable Mortgage Defense In Eviction/Ejectment Actions - Part 9

This is Part 8 of Equitable Mortgage Defense. Click here to see all posts on Equitable Mortgage Defense In Homeowner-Tenant Evictions.

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The following cases, a couple of old ones, and a couple of recent ones, come from the State of Florida and apply the law of equitable mortgage in a way so that in no case will the right of possession to property by a mortgagee be recognized in a Florida court until due foreclosure is had according to the forms of the law providing for foreclosure of mortgages. Obtaining possession via a tenant eviction or ejectment action when the legal title was received as security for a loan is legally impermissable.

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Walls v. Endel, 20 Fla. 86; (Fla. 1883)
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This case involved an action for ejectment by a title holder of property. The person in possession alleged that it was the owner of the property who had conveyed absolute title to the current title holder as security for the payment of money and that, therefore, the deed should be treated as a mortgage. The lower court refused to allow evidence that the arrangement between the parties should be treated as a mortgage.

In reversing the lower court, the Florida Supreme Court stated:

• "[T]he result of these facts is that the deed was given to secure the payment of money, and is therefore, by the rules of equity, only a mortgage, and the statute we have cited declares it to be a specific lien, and that the holder cannot have possession without due foreclosure, decree and sale; while the judgment at law would give possession without foreclosure and sale ... [I]f the plaintiff has only a specific lien on the property, though it is in form a deed in fee, it is not only inequitable but contrary to the plain words of the statute that he should obtain possession otherwise than by due foreclosure of the mortgage interest."

The Florida high court also cites a Wisconsin Supreme Court case, Kent vs. Agard, 24 Wis. 378, another eviction case, in support of its decision, in which it was said:

• "[T]he plaintiff should have been allowed to show by parol that the absolute deed was intended as a mere security and was consequently only a mortgage. That this may be done in some form of action is not contested. And I see no reason why it may not be done in an action to recover the possession of real estate. When the facts are proved such deed is a mortgage only, both in law and in equity. The rights of the mortgagor and mortgagee are precisely the same as though the defeasance were contained in the deed itself. The only difference is in the manner of proving the defeasance."

It also cites Saunders vs. Stewart, 7 Nev. 200, a Nevada high court case, where it was observed:

• "The doctrine is that such evidence is not received to contradict an instrument of writing, but to prove an equity superior thereto."

Walls v. Endel, 20 Fla. 86 (Fla. 1883)

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Folks v. Chesser, 106 Fla. 837; 145 So. 602; (Fla. 1932)

The Florida high court made the following observations in connection with an equitable mortgagee's right of possession to be obtained only after a mortgage foreclosure is had.

• "Our statute enacts a recognized rule of equity, that all deeds of conveyance conveying or selling property for the purpose, or with the intention, of securing the payment of money, shall be deemed and held as mortgages, and shall be subject to the same rules of foreclosure and the same regulations and restrictions as are prescribed by law in relation to mortgages." See Sections 5724-5725 C.G.L. 3836-3837 R.G.S.

• "Under these statutes, in no case will the right of possession to property by a mortgagee be recognized in a court of justice in this State, until due foreclosure is had according to the forms of the law providing for foreclosure of mortgages."

Folks v. Chesser, 106 Fla. 837; 145 So. 602; (Fla. 1932)

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Blanco v. Novoa, 854 So. 2d 672; (Fla. App. Ct. 3rd Dist.) 2003

This case dealt with an eviction action. The trial court granted a motion that, in effect, treated the subject transaction as a landlord-tenant relationship. In reversing, the Florida appellate court ruled that the relationship between the parties was a mortgagor-mortgagee relationship and, as such, the appropriate cause of action to seek possession for non-payment is a foreclosure proceeding, not an eviction action.

The facts of the case follow:

Novoa and his niece, Blanco, took joint title to a condominium. Novoa purchased the property with his own funds. Shortly after the purchase, Blanco and Novoa entered into an agreement whereby Blanco would take possession of the property and pay $ 740 per month to Novoa, as well as all condominium assessments and property taxes.

According to the text of the case:

• "The parties used a standard landlord-tenant lease form in which the monthly payments to Novoa were called "rent", Blanco was called the "lessee" and Novoa the "lessor."

• "However, the agreement also contained a clause that obligated Novoa to sell the property and Blanco to purchase the property for $ 89,831.56 in five years. Blanco was in possession of the condominium and made payments from November 1, 2000 until October 1, 2002."

• "[A] Quit Claim Deed was recorded which purportedly gave Blanco's half interest in the condominium to Novoa. Blanco claims not to have signed the document."

• "Blanco had not made any of the payments required by the agreement since November 1, 2002. On December 19, 2002, Blanco filed a complaint seeking to cancel the Quit Claim Deed, monetary damages for fraud in the execution of a Quit Claim Deed to real property, and specific performance of the contract for sale of the unit."

• "Novoa counterclaimed for breach of contract and eviction in March, 2003. Novoa then filed a motion to require Blanco to post rent with the registry of the court or be defaulted on the counterclaim for eviction."

• "The trial court granted the motion and ordered Blanco to deposit $ 5,180.00 into the court registry within fifteen days of the order or waive any defenses to the eviction. The deadline was twice extended to accommodate this appeal."

• "The trial court construed the agreement between Blanco and Novoa to be a lease and consequently applied the law governing landlords and tenants. For a tenant to contest an eviction action, any defense other than payment requires the tenant to deposit accrued rent and any rent which accrues during the pendency of the proceeding into the court registry." See 83.60(2), Fla. Stat. (2003).

• "The trial court erred by requiring Blanco to deposit payments into the court registry because Novoa and Blanco were not simply landlord and tenant, respectively, they shared an equal interest in the property. The agreement provided for monthly payments equal to ten percent interest with the payment of fees and taxes consistent with those a mortgagor would make. Blanco would buy out Novoa's interest in the condominium at the end of five years with a final balloon payment."

• "The Quit Claim Deed, if genuine, would make them landlord and tenant. However, if it is a forgery, the two are joint tenants. To impose the obligation to pay rent into the registry of the court is to decide the validity of the Quit Claim Deed and provide the remedy before the case is properly adjudicated in court."

• "Under section 697.01, Florida Statutes (2003), "[a]ll conveyances, obligations conditioned or defeasible, bills of sale or other instruments of writing conveying or selling property . . . for the purpose or with the intention of securing the payment of money . . . shall be deemed and held mortgages . . . ." In deciding whether a conveyance should be declared a mortgage under the statute "depends on the particular facts, and as the statute provides, is a question of the parties' intent." Valk v. J.E.M. Distribs., 700 So. 2d 416, 419 (Fla. 2d DCA 1997). "[E]quity will look at and take into consideration all the facts and circumstances surrounding the transaction and will decree an instrument to be a deed or mortgage according to the real intentions of the parties." Id. (alteration in original)."

• "The substance and not the form is what is critical. Here, the trial court erred by determining that the words "lease" and "rent" controlled when the parties clearly acted not as landlord and tenant, but rather as mortgagor and mortgagee."

• "Thus, the remedy available to Novoa in this case is that of a foreclosure proceeding."

Blanco v. Novoa, 854 So. 2d 672; (Fla. App. Ct. 3rd Dist.) 2003

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Editor's Note:

The trial judge in this case apparently had difficulty in "seeing through" the "labels" that were used in the documents and allowed him/herself to be controlled by the "labels" in the legal documents used in the transaction (ie. "lease" and "rent"). The Florida appeals court decision in this case represents a good, clear illustration as to how trial judges should interpret these types of documents in the context of an equitable mortgage claim.

In this case, the label "rent" was used in an attempt to disguise what, in substance, were the "mortgage payments" on an equitable mortgage. The term "lease" was used in attempting to disguise a legal document that, in substance, was not a lease at all, but rather, was more akin to a "promissory note" secured by an equitable mortgage.

Both this case and the next case illustrate one of the practical problems that foreclosure rescue victims may face when having their cases heard in court. That is, they may have a tough time convincing a busy trial court judge to take the time and make the effort to carefully examine the true substance of a sale leaseback, foreclosure rescue transaction and to correctly declare said transaction as being an equitable mortgage. It may be easier for a judge to simply read the documents, rule based on the form of the transaction and, if the foreclosure rescue victim disagrees with the ruling, extend the victim an "invitation" to take it up with an appeals court.

(I suspect, however, that as more of these cases get "reported", some trial judges may end up feeling "pressured into" making a correct ruling from the "get-go".)

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Minalla v. Equinamics Corp., (Fla. App. Ct., 3rd Dist.) March 21, 2007

A Florida appellate court ruled last month that a Miami-area foreclosure rescue operator cannot evict a homeowner who signed away title to her home in a "sale-leaseback-buyback option" arrangement until a determination is made as to who the true owner of the property is and effectively ruling that the Florida Residential Landlord Tenant Act is not applicable to such a transaction unless and until such a determination favorable to the operator is made.

The case involved a situation where, at some point after a financially strapped homeowner signed away the title to her home to a foreclosure rescue operator, the operator attempted to evict her. The homeowner asserted the defense that she was the true owner. The lower court ruled that, pursuant to the applicable provisions of the Florida Residential Landlord Tenant Act, she had to pay into the court registry the rent that was called for in the leaseback of her home while the court proceedings were pending. According to the appellate court, which subsequently reversed the lower court's decision (bold text is my emphasis):

• "[The homeowner] alleges she was tricked into conveying her home to Equinamics in a transaction which is impressed with characteristics of a sale, but in reality is a disguised loan secured by her home. If this is accurate, then Equinamics is not an owner of [the homeowner's] residence but rather a lender who must proceed to oust [her] via a foreclosure action."

The court then made this observation:

• "Based upon the facts of this case, it is apparent that the transaction by which Equinamics received title to the Minalla residence was not an ordinary real estate transaction. Likewise, the circumstances under which Minalla continued to remain on the property after she executed the special warranty deed to Equimanics was not possessed of the trappings of a usual landlord tenant relationship."

Ultimately, in reversing the lower court ruling to the contrary, the appellate court ruled as follows:

• "[T]here is a factual dispute in this case concerning who is the true owner of the property. Because the trial court's order requiring payments by Minalla of monies into the registry was made without conducting an evidentiary hearing concerning the nature of the transaction and who is the true owner of the residence, the court erred in imposing the payment requirement upon her."

(The homeowner is being represented by attorney James A. Bonfiglio, Boynton Beach, Florida.)

Minalla v. Equinamics Corp., (Fla. App. Ct., 3rd Dist.) March 21, 2007 (Court decision made available online courtesy of the Florida Third District Court of Appeal).

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Editor's Note:

To Florida attorneys, I again feel compelled to repeat an observation that I made elsewhere on this blog (at the end of Equitable Mortgage & Usury In Sale Buyback Deals In Florida) in connection with the binding effect of Florida appellate decisions on the Florida trial courts. That is, that unless the Florida Supreme Court rules otherwise, and absent a conflicting decision from a Florida appeals court from another district, the ruling in Minalla that the trial court erred in treating the transaction as a landlord-tenant arrangement "without conducting an evidentiary hearing concerning the nature of the transaction and who is the true owner of the residence" is binding not only on trial courts located within the Third District Court of Appeal, but is binding on all trial courts throughout the State of Florida.

(See the comment to this effect in the Florida Supreme Court case in Pardo v. State, 596 So. 2d 665 (Fla. 1992). ("[T]he district court erred in commenting that decisions of other district courts of appeal were not binding on the trial court. This Court has stated that the decisions of the district courts of appeal represent the law of Florida unless and until they are overruled by this Court. Thus, in the absence of interdistrict conflict, district court decisions bind all Florida trial courts." [citations and internal quotations omitted]).

I will hasten to add that the Florida Supreme Court has already addressed the "landlord-tenant" vs. "mortgagee-mortgagor" issue that exists in an eviction/ejectment action when an equitable mortgage claim or defense is raised. See Walls v. Endel, supra, and Folks v. Chesser, supra. However, I realize that there may be some judges and attorneys who may be reluctant to rely on cases that are approximately 125 years old (Walls) and 75 years old (Folks).

For those who choose to disregard the above-cited Florida Supreme Court decisions, you can cite the brand new appellate decision in Minalla as to the "landlord-tenant" vs. "mortgagee-mortgagor" issue; and then cite Pardo (and the cases cited therein) as to the binding effect of a decision of one Florida appellate court on all trial courts throughout Florida.

With all this being said, I hope that (some) Florida trial judges will be less likely to disregard the substance of these sale-leaseback-repurchase option, foreclosure rescue deals, and make rulings consistent with all of the aforementioned cases.

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With regard to the binding effect that Florida's intermediate appellate court decisions have on the Federal Courts deciding issues of Florida state law, see Binding Effect Of State Court Decisions On Federal Courts On State Law Issues.

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General Jurisdiction Courts vs. Limited Jurisdiction Courts

In the above cases, the jurisdiction of the lower courts to hear tenant eviction/ejectment actions was not raised as an issue. It appears that the lower courts in these cases were all courts of general jurisdiction, and accordingly, had jurisdiction to hear both the eviction/ejectment actions and the equitable mortgage issue, which affects the title to property.

In a case where the equitable mortgage issue was raised as a defense in an eviction action where the lower Florida court hearing the case was a court of limited jurisdiction (a "County Court", as opposed to a "Circuit Court"), and in which the court had no jurisdiction to make rulings affecting the title to property, see Hewitt v. State, 101 Fla. 807; 135 So. 130; (Fla. 1931), and the comments on that case at Using Equitable Mortgage Defense Against Eviction In A Foreclosure Rescue Situation. emdefense Florida equitable mortgage alpha

Equitable Mortgage Defense In Homeowner-Tenant Evictions - Part 8

This is Part 8 of Equitable Mortgage Defense. Click here to see all posts on Equitable Mortgage Defense In Homeowner-Tenant Evictions.

In this installment, coverage of the equitable mortgage doctrine, generally, and its application in the context of lawsuits for ejectment/eviction, specifically, includes cases from the State of Washington.

Puget Sound Inv. Group, Inc. v. Bridges
92 Wn. App. 523, 963 P.2d 944
(1998)

This case is really not an equitable mortgage case. It deals, however, with the inappropriateness of bringing an action for unlawful detainer by a purchaser of real property at an IRS tax foreclosure (who received a quit claim deed) to remove the prior owner who remained in possession of said property ("tenant" holding under color of title) without first establishing the superiority of its title over that of the prior owner. Since the case involves an action for unlawful detainer involving two parties each having competing claims to title over the same property, I chose to include a brief discussion of the case here. The facts of this case are somewhat analogous to the typical foreclosure rescue situation involving a sale-leaseback with a buyback option, at least with respect to the competing ownership claims of the foreclosure rescue operator, as the record titleholder, and the financially strapped homeowner, who asserts title to the property under an equitable mortgage claim.

In affirming the lower court in ruling that it was not proper for an IRS tax sale purchaser of real estate to obtain possession from the prior owner, who remained in possession after the sale, through an action for unlawful detainer, the Washington appeals court made this observation of what unlawful detainer actions are all about:

• "The unlawful detainer chapter, RCW 59.12, provides a summary proceeding for obtaining possession of real property, and gives the proceeding priority over other civil cases. The court's jurisdiction in unlawful detainer proceedings is limited to the right to possession of real property and a few related issues such as damages and rent due. Unlawful detainer actions offer a plaintiff the advantage of speedy relief, but do not provide a forum for litigating claims to title."

(citations omitted)

The court ultimately ruled that, because the person in possession claimed ownership under color of title based on his warranty deed, the tax sale purchaser must establish superior title over the prior owner before it may proceed with an unlawful detainer action. The court stated that "[t]he appropriate procedure is an action in ejectment and quiet title under RCW 7.28."

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Where a financially strapped homeowner, who after signing away title to his/her home to a foreclosure rescue operator in exchange for a leaseback and option to buy (or a repurchase agreement under a contract for deed), finds him/herself being evicted in an unlawful detainer action, the homeowner's assertion of a claim of equitable mortgage should, in my view, put him/her in a similar position with respect to the color of title issue that would require an action for quiet title and ejectment. While Puget Sound Inv. Group, Inc. v. Bridges doesn't deal with an equitable mortgage situation, it seems that both a homeowner's ownership claim under the equitable mortgage doctrine and the foreclosure rescue operator's ownership claim as record owner are the types of competing claims of ownership that make the summary procedures of unlawful detainer unavailable to a foreclosure rescue operator, similar to the result in Puget Sound.

Puget Sound Inv. Group, Inc. v. Bridges, 92 Wn. App. 523, 963 P.2d 944 (1998)

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While I have already briefly written about the following cases in a prior post, see Equitable Mortgage Doctrine In Washington State, I will include them again here, inasmuch as they deal with actions by a "purported" owner of property to recover possession thereof from one in possession who asserts title to same under an equitable mortgage claim.

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Mears v. Strobach, 12 Wash. 61; 40 P. 621 (Wa. 1895) (involves an action to recover possession of land.)

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The "tenant" being sued for eviction successfully made equitable mortgage claim against purported "owner"; in addition, notwithstanding testimony to the effect that the plaintiffs refused to make a loan and would only consent to advance the money upon an absolute conveyance to them of the property, "[the] testimony, interpreted in the light of the instruments actually executed, and of the other facts sufficiently proven by the evidence, fails to satisfy us that the transaction was not, after all, substantially one of lending and borrowing." The court further stated:

• "In our opinion, there was no intention on the part of either of the parties to do more than on the one part to secure the loan of the money and on the other to loan it and get proper security for re-payment with interest. This being so, the bare fact that they refused to loan the money and take a mortgage only tends to show that they thought they could evade the law, requiring the mortgage to be foreclosed before they could get possession of the property, by taking a deed, as they did, and giving a lease and an option to purchase to the grantors named in the deed."

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Snyder v. Parker, 19 Wash. 276, 53 P. 59 (Wa. 1898) (involves an action to recover possession of land. The "tenant" being sued for eviction successfully made equitable mortgage claim against purported "owner"; the deed held by the "owner" was given as security for a debt, and was not an absolute conveyance and, accordingly did not pass title. In ruling, the Washington high court remarked, "It is an elementary principle that in ejectment the plaintiff must recover on the strength of his own title. The instrument in suit having been found a mortgage, appellant should not recover possession under its terms."

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Pearson v. Gray, 90 Wn. App. 911, 954 P.2d 343 (Wa. App. Ct. 1998) One claiming ownership under equitable mortgage doctrine has standing to bring quiet title action; in addition, the trial court's order in favor of legal title holder in unlawful detainer action and writ of restitution reversed and remanded until a finding of ownership in the quiet title action is reached. The court observed, "The purpose of an action for unlawful detainer is to determine who has the right of possession. [...] [A]s issues of ownership in the quiet title action still remain unresolved, the finding in the unlawful detainer action and the grant of the writ of restitution are premature."

Go here for other posts on the equitable mortgage doctrine in Washington State. Washington State equitable mortgage whale emdefense

Equitable Mortgage Defense In Homeowner-Tenant Evictions - Part 7

This is Part 7 of Equitable Mortgage Defense. Click here to see all posts on Equitable Mortgage Defense In Homeowner-Tenant Evictions.

In this installment, coverage of the equitable mortgage doctrine, generally, and its application in the context of lawsuits for ejectment/eviction, specifically, includes cases from Idaho, Ohio, Oregon, Alabama, and South Dakota.

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Idaho

Dickens v. Heston
53 Idaho 91; 21 P.2d 905
(Id. 1933)

In this action for ejectment, the financially strapped property owner successfully asserted an equitable mortgage defense in the lower court against the title holder who, the court found, acquired said title as security for a debt. On appeal, the Idaho Supreme Court unanimously affirmed the lower court decision and listed the following factors as being some, but not necessarily all, the factors to be considered when determining whether instruments constitute a mortgage:

• Existence of debt to be secured,
• Satisfaction or survival of the debt
• Previous negotiations of parties
• Inadequacy of price
• Financial condition of grantor
• Intention of parties

Commenting specifically on the issue of inadequacy of price, the Idaho high court commented as follows (bold text is my emphasis):

"It is said in 41 C. J. 288, sec. 24, that:

• "If the grantor was severely pressed for money at the time of the transfer, so as not to be able to exercise a perfectly free choice as to the disposition of his property, and raised the sum needed by conveying his property in fee with a right of repurchase, his necessitous condition, especially in connection with the inadequacy of the price, will go far to show that a mortgage was intended.""

"In Johansen v. Looney, 31 Idaho 754, 761, 176 P. 778, 780, this court said:

• "Notwithstanding some apparent conflict in the above authorities, the holding is general that the transaction must be fairly made for a consideration not grossly inadequate, and that any fraudulent or oppressive conduct on the part of the mortgagee is sufficient to annul the absolute character of the transfer." ( Alexander v. Rodriguez (79 U.S. 323, 12 Wall. 323, 20 L. Ed. 406), Gassert v. Strong, (38 Mont. 18, 98 P. 497), Stoutz v. Rouse, (84 Ala. 309, 4 So. 170), Russell v. Southard, (53 U.S. 139, 12 HOW 139, 13 L. Ed. 927), Bradbury v. Davenport, (114 Cal. 593, 46 P. 1062, 55 Am. St. 92), Fort v. Colby, (165 Iowa 95, 144 N.W. 393), and Liskey v. Snyder, (56 W. Va. 610, 49 S.E. 515), supra; Keeline v. Clark, (132 Iowa 360, 106 N.W. 257.)"

"The following pertinent statement is made in Alexander v. Rodriguez, 79 U.S. 323, 12 Wall. 323, 339, 20 L. Ed. 406, 411:

• "The law upon the subject of the right to redeem where the mortgagor has conveyed to the mortgagee the equity of redemption, is well settled. It is characterized by a jealous and salutary policy. Principles almost as stern are applied as those which govern where a sale by a cestui qui trust to his trustee is drawn in question. To give validity to such a sale by a mortgagor it must be shown that the conduct of the mortgagee was, in all things, fair and frank, and that he paid for the property what it was worth. He must hold out no delusive hopes; he must exercise no undue influence; he must take no advantage of the fears or poverty of the other party. Any indirection or obliquity of conduct is fatal to his title. Every doubt will be resolved against him. Where confidential relations and the means of oppression exist, the scrutiny is severer than in cases of a different character. The form of the instruments employed is immaterial. That the mortgagor knowingly surrendered and never intended to reclaim is of no consequence. If there is vice in the transaction, the law, while it will secure to the mortgagee his debt, with interest, will compel him to give back that which he has taken with unclean hands. Public policy, sound morals, and the protection due to those whose property is thus involved, require that such should be the law."

"It cannot be successfully contended, in the light of the record before us, that Heston acted as a free man. He was in a situation, being without funds, where he was compelled, as expressed in the language of Dickens, to enter into the contract in question and make an absolute conveyance of his property, or nothing."

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There is much more in this case than the above observations of the Idaho court. Further, the Idaho high court reaches its decision on the reliance both on its prior decisions, and also to high court decisions of other states (ie. Kansas, California, Illinois, Iowa, Michigan, Montana, Alabama, West Virginia, and Colorado), not to mention a couple of citations to U.S. Supreme Court cases, thereby representing a seemingly broad view of the equitable mortgage case law. To read the whole case, see:

Dickens v. Heston, 53 Idaho 91; 21 P.2d 905; (Id. 1933)

Alexander v. Rodriguez (aka Villa v. Rodriguez), 79 U.S. 323, 12 Wall. 323, 339, 20 L. Ed. 406, 411 (1870) (available online courtesy of Justia - US Supreme Court Center)

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Ohio

Kaeser v. Gross
2002 Ohio 4050
(Ohio App. Ct., 1st Dist., 2002)

The financially strapped property owner (Gross) in this case also successfully asserted equitable mortgage in the lower court against a money lender (Kaeser) where Gross signed over his deed as part of a transaction where Kaeser provided him with some desperately needed funds.

In this case, Kaeser initiated a forcible detainer and eviction action in municipal court (limited jurisdiction court) against Gross. Gross filed an answer and a counterclaim in which he alleged that he was the true owner of the property. Due to the allegations in Gross's counterclaim, the case was transferred to the common pleas court (in transferring the case, it appears that the municipal court properly acknowledged its lack of jurisdiction to hear the equitable mortgage counterclaim, unlike the lower courts whose decisions were ultimately reversed in:

• Hewitt v. State, 101 Fla. 807; 135 So. 130; (Fla. 1931); see Using Equitable Mortgage Defense Against Eviction In A Foreclosure Rescue Situation (Part 1 of this series),

• Essex Property Servs., Inc. v. Wood, 246 N.J. Super. 487; 587 A.2d 1337; (1991); see Equitable Mortgage Defense In Homeowner - Tenant Eviction - Part 5, and
  
• Waters v. Randall, 47 Mass. 479 (Ma. 1843); see Equitable Mortgage Defense In Homeowner-Tenant Evictions - Part 6.)
  

In unanimously affirming the common pleas court decision in favor of the financially strapped Gross, the Ohio intermediate appellate court made a number of observations, including this one (bold text is my emphasis):

• "Ohio courts have consistently held that an instrument in the form of a deed may be construed in equity to be a mortgage if it is demonstrated that it was intended by the parties to convey the property involved as security for a debt or an obligation. n3 The Ohio Supreme Court in Wilson v. Giddings found the gross inadequacy of price and continued possession by the plaintiff to provide strong support for the determination that a plaintiff's conveyance of real estate to a defendant, although absolute in form, was not a sale absolute, but an equitable mortgage. n4
  
  n3 See Bank v. Johnson (1889), 47 Ohio St. 306, 24 N.E. 503; Patrick v. Littell (1880), 36 Ohio St. 79, 82; Wilson v. Giddings (1876), 28 Ohio St. 554.
  
  n4 28 Ohio St. at 566."

----------------------------------

At the end of this decision, the court concluded with this passing observation which, while probably constituting nothing more than dicta, will give you a flavor for what this case was about (in case you don't feel like reading the whole case):

• "In closing, we note that, if ever there were a situation that cried out for a court to use its equitable powers, this was the case. Here, an employee, who was in legal and financial difficulties, asked his employer for help. He made an agreement whereby his home was held as collateral for the repayment of his debts. The employer, seemingly intent on keeping the employee's property, went to extreme lengths to keep the employee from repaying his debt, first, by adding new debts not encompassed by the original agreement and, later, by attempting to evict the employee from his home. Here, the trial court used its equitable powers to term the agreement a mortgage. By doing so, it prevented Kaeser from retaining ownership in a $ 40,000 home in exchange for lending Gross roughly $ 6,000, some of which Gross had already repaid. Such a result would have been fundamentally unfair. Consequently, we affirm the judgment of the trial court."

-------------------------------

I will conclude this portion of the post by observing that the three Ohio Supreme Court decisions cited above by the Ohio appellate court in this 2002 case all date back to the 1800's, which seems to be pretty consistent with the equitable mortgage cases that I've written about in the past (and that I'll be writing about in the future) with respect to one point. That is, the case law in respect to the equitable mortgage doctrine in the United States not only appears to be pretty well-settled, but it seems like it's been well-settled for well over 100 years (I'm confident that in Great Britain, which is generally considered to be the source of the common law throughout the U.S., the equitable mortgage doctrine has probably been well-settled for at least 250 years). Accordingly, one shouldn't shy away from relying on the legal principles set forth in these cases simply because the cases are old. To read the whole case, see:

Kaeser v. Gross, (Ohio App. Ct., 1st Dist., 2002 Ohio 4050; 2002)

--------------------------------

Oregon

Long v. Storms
50 Ore. App. 39; 622 P.2d 731
(Or. Court of Appeals, 1981)

In this case, the title holder / money lender (Long) brought a forcible entry and detainer (FED) action in a limited jurisdiction court to recover possession of certain residential premises. The possessors (Storms) answered and counterclaimed, alleging that the warranty deed to the premises given to Long by Storms, should be declared an equitable mortgage, and that the loan transaction between the parties should be rescinded pursuant to the Truth in Lending Act, 15 U.S.C.S. § 1601 et seq.

Because defendants' answer and counterclaims raised an issue regarding the determination of title to real property, the case was transferred to circuit court, which had jurisdiction over such matters (Another case where a limited jurisdiction court correctly recognized its lack of jurisdiction when transferring the matter to the appropriate forum).

The circuit court ultimately ruled that the sale by Storms, followed by a 6 month leaseback with a buy back option was an absolute sale, and not a mortgage.

On appeal, the Oregon Court of Appeals reversed the lower court decision and, in so doing, quoted from the Oregon Supreme Court in Umpqua Forest Ind. v. Neenah-Ore. Land Co., 188 Or 605, 217 P2d 219 (1950):

• "Our decisions establish that if the intent appears that property was conveyed and received as security for the fulfillment of an obligation, the form of the instrument becomes immaterial and the true nature of the transaction may be shown by parol evidence. Neither fraud, mistake nor accident need be proven. The primary inquiry relates to the intention of the parties at the time the transaction was consum[m]ated. Harmon v. Grants Pass Banking & Trust Co., 60 Or 69, 118 P. 188. Mutual intent is to be determined, not alone by the instruments executed, but also by the attendant circumstances and the conditions under which the instruments were delivered. The issue can be resolved only after considering the situation of the parties, the price fixed relative to the value of the property and the conduct of the parties, both before and after the transaction, insofar as such conduct prospectively or retrospectively throws light upon the intent of the parties at the time of the transaction."

------------------------

The appellate court when on to set forth the circumstances that the Umpqua court pointed to as indicia that a mortgage was intended:

• the fact that negotiations originated from an application for a loan,
• the dire financial straits of the grantor,
• the grantor's continued possession of the property,
• the intimate business or social relationship of the parties,
• failure of the grantee to carefully investigate the title of the grantor,
• failure of the grantee to ascertain the value of the property,
• inadequacy of consideration,
• the lack of bargaining between the parties as to the value of the property with the controlling consideration being the profit inuring to the grantee,
• the existence of a deed absolute in form, that is accompanied by an option to repurchase, which must be considered together, and with the court stating that the option does not of itself convert the transaction into a mortgage, but it is a circumstance to be considered in favor of the existence of a mortgage.

The appellate court when on to make an observation after which it again quoted from Umpqua

"We recognize that a deed, absolute on its face, is presumptively what it appears to be and that evidence must be clear and convincing to support a finding that the deed is in reality a mortgage." [citations omitted] "Nevertheless, as pointed out by the Umpqua court,

• "* * * while recognizing the rule requiring clear and convincing evidence, the authorities in this and other states have also approved the rule applying peculiarly in courts of equity."
  
  "'[R]egardless of the view that may be entertained as to the presumptive character of a deed with a stipulation for a reconveyance, or as to the standard of proof necessary to establish the instrument or instruments as a mortgage, the authorities are in general agreement in support of the proposition that where the question presented is whether the transaction is a mortgage or a conditional sale, as distinguished from the question whether an unconditional sale is involved, evidence of a doubtful import will be construed in favor of the theory that a mortgage was intended, so that in such case a deed with a provision for a reconveyance will be construed as a mortgage rather than as a conditional sale.'" 188 Or at 646."

--------------------------

In concluding that the transaction was an equitable mortgage (thereby reversing the lower court), the Oregon appellate court pointed to the existence of a number of factors in making the following determination:

• "The undisputed evidence shows that defendants were financially distressed at the time of the transaction,
• that the purported sale price was substantially less than the fair market value of the property,
• that defendants remained in possession of the property,
• that plaintiff did not obtain an appraisal on the property until after the purported conveyance, and
• that there was no bargaining between the parties as to the consideration recited in the "deed." Instead, the controlling consideration was that plaintiff should realize a $ 1,000 profit plus costs.
• Finally, the form of the transaction was a deed absolute in form accompanied by an option to repurchase. That plaintiff did not require defendants to fill out a credit application does not persuade us that the transaction was a sale, not a loan. Plaintiff knew that defendants were financially distressed and had been unable to obtain a loan. Further, he had defendants' house as security. The sum of these facts squares clearly with our conclusion that the transaction between the parties constituted a loan with a security interest."

------------------------

The court also went on to rule that the Federal Truth In Lending Act (TILA) applied in this case, thereby allowing for a rescission of the transaction and an award of attorneys' fees to Storms' legal counsel, to be imposed on and paid by Long.

Because the court arrived at the conclusion that the relationship between the parties was that of debtor-creditor, rather than landlord-tenant, Long's forcible entry and detainer action was dismissed.

Long v. Storms, 50 Ore. App. 39; 622 P.2d 731; (Or. Ct. App. 1981), as modified by
Long v. Storms, 52 Or App 685, 629 P2d 827 (1981) (modification related to the attorney fee award under the TILA).

For a prior post on another Oregon case involving an equitable mortgage claim, see Swenson v. Mills, 198 Ore. App. 236, 108 P.3d 77, (Or. Ct. App. 2005) Highlights

---------------------------------

Alabama

Mobile Bldg. & Loan Asso. v. Robertson
65 Ala. 382
(Ala. 1880)

In this case, an individual, Robertson, approached Mobile Building & Loan Association (Loan Association) for a loan of $2,000 to purchase lots upon which he agreed to make $600 of repairs and improvements. Robertson had already negotiated the purchase and had entered into a contract with the seller. The transaction was structured as a sale by the owner of the lots to the Loan Association with a contemporaneous lease to Robertson with an option to buy. Upon completion of the repairs and the improvements by Robertson, the transaction was consummated, with Robertson taking possession of the premises pursuant to its lease from the Loan Association.

Ultimately, a dispute arose between the parties resulting in Robertson ceasing his lease payments, and the Loan Association commencing an action at law for the breach of the lease. Robertson countered by filing a bill for an injunction against the suit at law, and to have the contract declared a mortgage and for the redemption of the premises.

The lower court found that the transaction was in effect a mortgage, and that the stipulation for rent was a mere device to obtain more than lawful interest on the money loaned.

In affirming the lower court decision that the transaction between Robertson and the Loan Association was a mortgage, it based its decision on the following rationale:

• "Every conveyance of land, without regard to its form, which is in fact a security for an antecedent debt, or for a contemporaneous loan, in the contemplation of a court of equity is a mortgage. It inures and operates as a mortgage only, conferring on the parties reciprocal rights and remedies. The grantee may resort to a court of equity to have it so declared, and for its foreclosure, as well as the debtor for redemption."-- Bryan v. Cowart, 21 Ala. 92; Hughes v. Edwards, 9 Wheat. 489 [6 L. Ed. 142].

• "When it is ascertained that the parties intend security for a debt, the court intervenes, and without regard to any agreement existing between them,--rather upon a general policy the parties can not contravene,--attaches, as an inseparable incident, the right of redemption upon the payment of the debt."-- Eiland v. Radford, 7 Ala. 724 [42 Am. Dec. 610]; Wiliamson v. Culpepper, 16 Ala. 211 [50 Am. Dec. 175]; Locke's Ex'r v. Palmer, 26 Ala. 312; Skinner v. Miller, 5 Litt. 84; Walling v. Aikin, McMul. Eq. 1.

• "This is the well-defined legal consequence, when the fact is established, that security for a debt is what was intended, and this is the concurring intention at the time of the contract, which is to be deduced from the facts and circumstances attending the transaction."

• "There may be no independent evidence of the debt,--no bond, bill, or note, taken for its payment; it may rest wholly on implication from the nature, facts and circumstances of the transaction; it is sufficient that its existence is the fair, just implication."-- Conway v. Alexander, 7 Cranch 218 [3 L. Ed. 321]; Robinson v. Farrelly, 16 Ala. 472; Locke's Ex'r v. Palmer, 26 Ala. 312; Russell v. Southard, 12 How. 139 [13 L. Ed. 927]."

• "Indeed, when the purpose of the creditor is to avoid the appearance of a mortgage, it is not to be expected that he would defeat it by the introduction of an express covenant for the payment of the debt, or any other independent security, disclosing its existence."

• "In the numerous cases of this character, which have been before this court, there was no other evidence of the debt, than an absence in the conveyance of any words showing that it rested in the mere option of the grantor, whether he would perform the condition, and the inferences from the nature, facts and circumstances of the transaction. There can be no doubt, that the absence of independent evidence of the debt is a circumstance favoring an absolute or conditional sale, or other contract, in which it is optionary whether there shall or shall not be payment. It is but a circumstance, dependent for its weight upon other facts and circumstances, with which It may be connected.-- Conway v. Alexander, supra; Russell v. Southard, supra; Brown v. Dewey, 1 Sandf. Ch. 56."

• "Though there is no express promise to pay, yet, when from all the facts and circumstances it is fairly collected that the relation of debtor and creditor exists, and the amount which ought to be paid is ascertained, the law implies the promise, and an action of assumpsit will lie ( Russell v. Southard, supra, and authorities cited on page 152 [12 How. 139, 13 L. Ed. 927]); thus affording the creditor, in all events, security, and a remedy for the debt."

------------------------------

In light of the fact that the Alabama high court found it unnecessary to have an express promise to pay, and considering that the bylaws of the Loan Association indicated that one purpose for its existence was to loan money to its members, it affirmed the lower court decision declaring the arrangement a mortgage, and agreed with the lower court that the characterization of the periodic payments as "rent" was a disguise in order to evade the statute against usury. It concluded its opinion with the following statement:

• "The stipulation for the payment of rent was intended as compensation for the use of the money loaned. It is the only compensation contemplated, and the only compensation that, according to the contract, the borrower was bound to make. It is in excess of lawful interest, and is usurious. Whatever color or disguise ingenuity may throw over a loan for illegal interest, the courts are bound to disregard, or the statute against usury will be practically abrogated.-- Evans v. Negley, 13 Serge. & Rawle 218; Miller v. Bates, 35 Ala. 580."

Mobile Bldg. & Loan Asso. v. Robertson, 65 Ala. 382; (Ala. 1880)

See also Moorer v. Tensaw Land & Timber Co., 246 Ala. 223; 20 So. 2d 105; (Ala. 1944) (in which, in an action for ejectment, defendant successfully asserted equitable mortgage in preventing its eviction from property. Observations made by the Alabama Supreme Court in connection therewith were (bold text is my emphasis):

• "It is well settled that two writings connected by reference one to the other, or simultaneously made, with respect to the same subject matter and proved to be parts of an entire transaction constitute but a single contract as if embodied in one instrument." Sewall v. Henry, 9 Ala. 24; Byrne v. Marshall, 44 Ala. 355; Collins v. Whigham, 58 Ala. 438; Drennen v. Satterfield, 119 Ala. 84, 24 So. 723; Weeden v. Asbury, 223 Ala. 687, 138 So. 267; Frasch v. City of Prichard, 224 Ala. 410, 140 So. 394; Albert v. Nixon, 229 Ala. 273, 156 So. 775.

• "When such situation exists, it does not require equity to declare that to be the result, but the one contract consisting of the two writings is so treated at law as well as in equity."

• "A mortgage is sometimes said to be a conveyance by a debtor to a creditor of real or personal property, with a defeasance clause whereby the conveyance will be void and the debtor entitled to repossess the property if the debt is discharged by a day named." Mervine v. White, 50 Ala. 388; Sewall v. Henry, 9 Ala. 24.

• "It is wholly immaterial between the parties whether the defeasance clause is incorporated in the same instrument or in a separate instrument contemporaneously executed." 41 Corpus Juris 318, note 93; 41 Corpus Juris 610, section 578.

• "The defeasance clause may be in the form of an agreement for a reconveyance of the property to the grantor or for the revesting of title in him on paying the debt." 41 Corpus Juris 317.

• "A written instrument may be an equitable mortgage, either when there are no words of conveyance passing the legal title in praesenti ( O'Neal v. Seixas, 85 Ala. 80, 4 So. 745), or when it makes a present conveyance without the mortgage features expressed in it, but only in a parol agreement. Cases heretofore cited."

Moorer v. Tensaw Land & Timber Co., 246 Ala. 223; 20 So. 2d 105; (Ala. 1944)

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South Dakota

Myers v. Eich
2006 SD 69; 720 N.W.2d 76
(S.D. 2006)

This case involved a transaction between the parties which included a warranty deed to Myers (the lender) and a contemporaneous contract for deed back to the Eichs (the borrower) in exchange for $ 125,000 advanced to the Eichs in order for them to redeem their property from a recent foreclosure.

Ultimately, the Eichs defaulted, at which point Myers brought a forcible entry and detainer action, alleging that he was the fee simple owner of the property and the Eichs were leasing the premises from him. The Eichs counterclaimed for a declaration that they owned the shop property because the arrangement was actually an equitable mortgage and Myers was required to proceed by a foreclosure action. The lower court agreed with Myers that there was no equitable mortgage, but on appeal, the South Dakota Supreme Court reversed.

In reaching its decision, the South Dakota high court made these initial observations:

• "Equity requires that the transaction be treated according to its substance and effect, not its form." Star Enterprise v. Thomas, 783 F. Supp. 1564, 1568 (DRI 1992); see also Brenneman Mech. & Elec., Inc. v. First Nat'l Bank of Logansport, 495 N.E.2d 233, 239 (IndCtApp 1986); Humble Oil & Refining Co. v. Doerr, 123 N.J. Super. 530, 303 A.2d 898, 905-06 (NJSuperCtChDv 1973).

• "A purported absolute conveyance may be recharacterized as a mortgage, depending on the surrounding circumstances and the parties' intent." Adrian, 2002 SD 10, P11, 639 N.W.2d at 533; Abberton v. Stephens, 747 S.W.2d 334, 336 (MoCtApp 1988); Brenneman Mech. & Elec., Inc., 495 N.E.2d at 239.

• "One who asserts that an absolute deed is in fact an equitable mortgage must establish by clear and convincing evidence that such deed was intended as security for a debt." Adrian, 2002 SD 10, P11, 639 N.W.2d at 533 (citing Commercial & Sav. Bank v. Cassem, 33 SD 294, 145 NW 551, 552 (1914)).

• "Although "[o]ne of the essential elements of a mortgage is debt to be secured," whether a document was intended as security for a debt depends on the intent of the parties at the inception of the relationship." Abberton, 747 S.W.2d at 336 (examine the parties' intent when conveyance was executed); American Nat'l Bank v. Groft, 56 SD 460, 229 NW 376, 379 (1930) ("the broad rule is that whether such transaction is a sale upon a condition or a mortgage depends upon the actual intention of the parties at the time"); 59 CJS Mortgages § 36.

• "To ascertain the parties' intent at the inception of a transaction, we identify certain elements that, if present, favor a finding that a conveyance, absolute on its face, constitutes an equitable mortgage:

(1) pre-existing debt not extinguished with conveyance;

(2) conveyance made with agreement to re-convey;

(3) property value considerably more than the debt;

(4) property in original transaction not appraised and no discussion of its value in relation to sale price; and

(5) dealings between the parties akin to that of creditor-debtor."

----------------------------

In reversing the lower court decision and ruling in favor of Eich (the borrower / equitable mortgagor) and declaring the arrangement an equitable mortgage (with Myers as equitable mortgagee), the court made these statements:

• "Their relationship did not begin because the Eichs were attempting to sell their property, but because they needed money to redeem their property. Myers, a licensed real estate broker, provided them with the necessary money and then dictated the terms of their arrangement. The Eichs agreed to his conditions."

• "The fact that the conveyance and contract for deed were executed on the same day creates a strong doubt on whether this transaction was intended to be a sale."

• "The circumstances surrounding this case present a multitude of additional factors tending to prove an equitable mortgage."

• "First, there is no evidence that Myers ever planned to be the owner of the transferred property after he advanced the $ 125,000. In fact, the Eichs at all times retained possession of the premises and continued to be the sole operators of the truck repair business on the shop property." Steckelberg v. Randolph, 404 N.W.2d 144, 149 (Iowa 1987) retaining possession of transferred property is "inconsistent with theory of absolute conveyance").

• "Second, before the transaction, no discussions were had with respect to the value of the property in relation to the consideration provided and Myers did not have the property appraised. Instead, Myers advanced the exact amount the Eichs needed to redeem their property from First Bank of South Dakota and then charged a $ 10,000 fee for the transaction." See F. Gregorie & Son, 257 S.E.2d at 703-04 (citing 59 CJS Mortgages §§ 40-41).

• "Third, the home and shop properties were valued at approximately $ 200,000. It defies logic to conclude that the Eichs sold both properties for $ 125,000, and then also agreed to pay an additional $ 10,000 as a fee." Pittwood, 251 P at 286 ("where the disparity between the amount of the indebtedness and the value of the property is so great as to necessarily lead to the conclusion that the deed was intended as security, the courts will, without hesitation, so declare").

• "Further evidence that a sale was not intended is the declaration in the letter from Myers to the Eichs summarizing their arrangement. He specifically stated that the conveyance was intended to provide security for the transaction, and he did not suggest that the $ 125,000 was consideration for a purported sale."

----------------------------

In connection with allowing the use of parol evidence by the Eichs in order to make their case, the court, quoting from their decision in Adrian v. McKinnie, 2002 SD 10, 639 N.W.2d 529 (which, in turn, quoted from their decision in Wilson v. McWilliams, 16 SD 96, 91 NW 453 (1902)) stated:

• "[w]here there is a deed, and contract to re-convey, and oral evidence has been introduced tending to show that the transaction was one of security, and leaving upon the mind a well-founded doubt as to the nature of the transaction, then courts of equity incline to construe the transaction as a mortgage."

------------------------------

In concluding its opinion, the court made a comment regarding the fact that the mere existence of a lease in this arrangement doesn't mean that it should be recognized as such and then quoted from its Wilson decision:

"It has long ago been recognized in South Dakota that

• "[p]arties seeking to take an undue advantage of mortgagors situated as the plaintiff was in this case almost invariably seek to cover up the transaction by inducing the party to whom the loan was really made to take a lease of the property; hence the mere fact of leasing should have but little weight with a court of equity, which seeks to discover the real transaction.""

Wilson, 16 SD 96, 91 NW at 457; see also Adrian, 2002 SD 10, P16 n.2, 639 N.W.2d at 535 n.2..

---------------------------

The South Dakota high court, much like the Idaho high court in Dickens v. Heston, above, arrives at its decision in reliance on both its prior decisions and court decisions from various other jurisdictions (ten other states, by my count). Accordingly, this decision also appears to seemingly reflect a broad based view of the equitable mortgage doctrine.

.

Myers v. Eich, 2006 SD 69; 720 N.W.2d 76; (S.D. 2006)

For a prior post on this case, see South Dakota Supremes Say "No Sale" In Equitable Mortgage Cases. emdefense other states equitable mortgage doctrine

Equitable Mortgage Defense In Homeowner-Tenant Evictions - Part 6

This is Part 6 of Equitable Mortgage Defense. Click here to see all posts on Equitable Mortgage Defense In Homeowner-Tenant Evictions.

.

In this episode of a (possibly never-ending) multi-part series, I will be touching on an old Massachusetts case that I stumbled into where the court had the opportunity to address the equitable mortgage defense asserted by an "alleged" tenant who claimed to be the true owner of the premises and who claimed that the purported "owner" attempting to evict him was, in essence, an equitable mortgagee who was a grantee of a deed given as security for a debt.
.

Waters v. Randall

47 Mass. 479

(Ma. 1843)
.

This 160+ year old case is certainly an oldie but goodie. While I had some reluctance in reporting on this case because of its age, I thought better of it and decided to mention the case here and let the Massachusetts legal experts decide if the case has any current viability (bold text is my emphasis).

This is an action, brought by a certain Waters, to recover possession of two parcels of property from a certain Randall. Because the action was deemed, in equity, to be a foreclosure action, and the court in which the action was brought did not have jurisdiction to hear foreclosure actions, the case against Randall was dismissed.

The facts of the case and the court's observations follow:

Indebteded to Waters, Randall quit-claimed his title to two parcels of property to Waters for the purpose of securing the existing indebtedness. Contemporaneously with the quit-claim, Randall gave Waters a bond to evidence the existing debt to Waters. By agreement, Randall maintained possession of the parcels, and upon repayment of either all or part of the debt, Waters agreed to reconvey that portion of the parcels with a value equal to the amount of debt repaid.

In defense against the action to recover possession, Randall claimed to be the true owner of the property and, given that, in equity, the action was an action to foreclose a mortgage, the court in which the action was brought did not have jurisdiction to hear the matter.

The court stated that:

• "The bond, given at the time of making the deed, is an instrument of defeasance, and the land is therefore held in mortgage; and the stipulations in the bond do not affect or alter the character of the conveyance."

The court went on to explain their reasoning:

• "The law has always contemplated with jealousy any attempt to evade its provisions in respect to the right of redemption of estates conveyed for security. And while, by reason of a breach of the condition of the deed, the estate becomes absolute in the mortgagee, in law, yet equity has always preserved to the mortgagor a right of redemption of the mortgaged premises. The provision in the present case between the parties was, that Randall should continue in possession, so long as he saved Waters harmless from his liabilities."

• "And on the other hand, when Waters should be compelled to meet and discharge any of such liabilities, then, by said agreement, he might take immediate possession of the estates, according to the estimated value, to such an extent as should be equal to the debt or liability so paid or cancelled by him; or, in other words, so fast as he pays money for Randall, which is not forthwith repaid, he may take possession of so much of the mortgaged property as shall be equal to such advance, agreeably to their estimate of value. And so, when an amount equal to the whole value shall have been advanced for Randall, then Waters will be entitled to the whole estate."

• "But this stipulation does not change the nature of the instrument, but is a mere provision for his obtaining possession of the mortgaged premises; and while the estate thus becomes absolute in him at law, it is merely the commencement of his foreclosure in equity."

• "If it were otherwise, a new description of conveyance would be created, to be treated as a mortgage, or not, at the option of the money lender; for here is no obligation on his part to take the estate, and cancel the debts and liabilities, but only a right so to do; and in this manner the statute of mortgages would be broken in upon at pleasure, and new evasions of the laws against usury would spring into being."

• "And though the transaction in the present case may have been made in perfect fairness, as it regards the full value of the premises mortgaged, so that the tenant would not be injured by the demandant's becoming the present absolute owner of the estates, at the agreed prices, yet we cannot treat it in any other light than a mortgage."

• "And though mortgages are made with a power also, on the part of the mortgagee, to sell the mortgaged premises -- like the case of Eaton v. Whiting, 3 Pick. 484; and though a separate deed of defeasance, made at the same time with the absolute deed, may afterwards, upon sufficient consideration, be cancelled as between the parties, in such manner as to give an absolute title to the mortgagee -- the rights of third parties not having intervened -- as was decided in the cases of Trull v. Skinner, 17 Pick. 213, and Harrison v. Phillips Academy, 12 Mass. 456; yet I believe no case can be found, in which it has been determined that the mortgagee can, by force of any agreement made at the time of creating the mortgage, entitle himself, at his own election, to hold the estate free from condition, and cutting off the right in equity of the mortgagor to redeem."

• "Such an agreement would not be enforced as against a mortgagor; nor is it to be confounded with a sale upon condition. Under these views, we are of opinion that the relation of these parties is that of mortgagee and mortgagor, and consequently that this court has no jurisdiction of the suit. The same must therefore stand dismissed, with costs for the tenant."

--------------------------------------

In this case, the property owner (Randall) maintained possession of the premises after the quit-claim, and it appears that the amount of Randall's debt approximated, if not exceeded, the value of the parcels conveyed. In spite of the lack of disparity between the value of the property conveyed and the amount of the debt owed, the court seemed to have no problem deciding that the bond given by Randall contemporaneously with the deed operated as an instrument of defeasance and, accordingly, treated the arrangement as a secured loan (mortgage) transaction, not an absolute sale.

.

Unlike other cases I've written about, there was no fraud involved here, nor were there any inequitable advantages taken of pressing wants, and no sale for a consideration that was found to be manifestly inadequate by the court. The court in this case actually observed that "[t]he transaction in the present case may have been made in perfect fairness, as it regards the full value of the premises mortgaged...". Nevertheless, it appears that the bond given by Randall contemporaneously with the deed, being found to operate as an instrument of defeasance, was enough to cause the entire arrangement to be deemed a mortgage.

.

Question:

.

In the context of a foreclosure rescue transaction (involving sale with a lease buy-back arrangement), would a Massachusetts court similarly treat the lease, coupled with either an "option to buy" or a "repurchase contract with delayed closing", as instruments of defeasance?

.

Inasmuch as the court in Waters v. Randall expressed strong concerns about money lenders' activities, generally, in connection with:

• "any attempt to evade [statutory] provisions in respect to the right of redemption of estates conveyed for security", and
• "new evasions of the laws against usury [that] would spring into being",

seeking to treat leasebacks, options to buy, and repurchase agreements with delayed closings as instruments of defeasance is something that may be worth thinking about if one represents financially strapped homeowners who have entered into foreclosure rescue deals. emdefense Massachusetts equitable mortgage saturn

Equitable Mortgage Defense In Homeowner - Tenant Eviction - Part 3 Addendum

This is an addendum to the post dealing with the equitable mortgage defense in California. Click here to see the prior post, Equitable Mortgage Defense In Homeowner - Tenant Eviction - Part 3. Subsequent to that post, I came across a pretty old California Supreme Court case which, if it is still good, both provides additional support for the viability of the equitable mortgage defense in an eviction/ejectment action, and further, may constitute the law of the state regarding this defense in homeowner-tenant evictions in California.

Hyde v. Mangan, 88 Cal. 319, 26 P. 180; (1891)

This case was an action for ejectment. The defendant, Mangan, was the equitable owner of property which was purchased on a deferred sale contract, where the legal title owner, a railroad, was to keep legal title to the property until Mangan fully paid off the contract (within five years of the sale contract). Upon entering the contract, Mangan "entered into the possession of said property, and ever since said time have been in the open, notorious, and exclusive possession and occupancy thereof, having valuable improvements thereon, and claiming to own the same."

About 4 years later, Mangan borrowed money secured by the equitable interest in the property. As part of the loan agreement, Mangan assigned the equitable interest in the property as collateral for the loan to the lender.

Within the next 4 1/2 years, the ownership interest in the property assigned by defendant Mangan to the lender as collateral was assigned and reassigned until the interest ended up in the hands of the plaintiff, Hyde (the railroad had yet to receive full payment on the original sale to defendant Mangan). A week after receiving the assignment, plaintiff Hyde made full payment to the railroad company for the land, surrendered the contract, received a deed to the land from the railroad company, and subsequently began an ejectment action to remove defendant Mangan from the property.

The lower court, in ruling for the defendant Mangan in the ejectment action, found that:

• the assignment of the contract of sale to the original lender was a mortgage of defendants' Mangan interest in the land,
• the possession of defendants Mangan was sufficient to put plaintiff on inquiry as to their rights, and
• having failed to make such inquiry, Plaintiff was in no better position than if he had done so, and had been fully informed as to the defendants' claims and equities.

On appeal to the California Supreme Court, plaintiff Hyde (now the appellant) "[r]elies upon two main propositions in this case, either of which, if maintained, he claims would entitle him to recover:

1. That he is the owner and holder of the legal title to the premises, and in an action of ejectment, the legal title must control;

2. If the assignment of the contract were to be held to be a mortgage, the debt for which it was given being barred, defendants are entitled to no consideration without offering to redeem."

With regard to these two propositions, the California high court responded as follows (bold text is my emphasis):

• "The first proposition, that "in an action of ejectment the legal title must control," is not the law of this state. The case of Willis v. Wozencraft, 22 Cal. 615, decides: "A mere equitable title to land, if it is of such a character as entitles the holder to possession in equity, is a sufficient defense under our system of practice to an action for the possession, brought even by the holder of the legal title. ( Central Pacific R. R. Co. v. Mudd, 59 Cal. 585; Whittier v. Stege, 61 Cal. 238; Hicks v. Lovell, 64 Cal. 17; 49 Am. Rep. 679.)"

• "As to the second proposition contended for by appellant, there is a line of authorities which supports such contention. (Hughes v. Davis, 40 Cal. 120; Bruck v. Tucker, 42 Cal. 352; Pico v. Gallardo, 52 Cal. 206.) This proposition of law as laid down in the cases just cited is based upon another principle of law, established for the first time in this state in Hughes v. Davis, 40 Cal. 120, and which has since been discarded by section 2925 of the Civil Code. This principle as announced by the court was, "that an absolute deed which is shown by parol evidence to have been intended as a mortgage conveys the legal title to the property." And our attention has not been directed to any authority since this principle ceased to be the law of this state which has held to the doctrine laid down in those cases; but upon the contrary, the later decisions of this court hold that under the general issue the defendant may be allowed to show that the deed by which the plaintiff claims title is a mortgage, and therefore gives him no title."

With regard to the issue of possession of the land by the defendant Mangan (now the respondent), the high court observed (bold text is my emphasis):

• "The plaintiff came into court in this action with full notice of all the rights and equities existing between the railroad company and the defendants, and between Brownstone and his assignees and the defendants; for the defendants were in the open, notorious, and exclusive possession of this land at all these times, and plaintiff made no inquiry to ascertain the rights or claims of defendants, and he is in no better position, and no more entitled to be regarded as a purchaser in good faith than if he had so inquired and ascertained the real facts of the case. ( Pell v. McElroy, 36 Cal. 268; Bank of Mendocino v. Baker, 82 Cal. 114; Scheerer v. Cuddy, 85 Cal. 273.) Neither could the plaintiff be recognized as a bona fide purchaser from his assignor, Erlanger, upon the additional ground that in the sale of equitable interests the principle of bona fide purchasers has no standing. (Taylor v. Weston, 77 Cal. 534.)"

With regard to plaintiff Hyde's payment of the balance of the contract to the railroad company in exchange for the deed, the court stated:

• "If we regard the plaintiff as the assignee of the railroad company, he then purchased the legal title subject to the equitable title of the defendants under the contract, and his legal rights in maintaining this action are identical with those of his assignor; and under the facts as disclosed by the record in this case, the railroad company could not prevail in this action."

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On the basis of this decision, it appears that a tenant who is being evicted (at least in California) has the right to challenge the title of the purported landlord seeking ejectment under the equitable mortgage doctrine and, if it can be established that the purported landlord's interest in the property is nothing more than a mortgage, the purported landlord should not prevail.

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While the issue I wanted to touch on here was the availability of the equitable mortgage defense in an eviction/ejectment action where the tenant is claiming to be the equitable owner of the property, a second issue was also touched on. That issue involves the principle that, when one is in open, notorious, and exclusive possession of property, a subsequent purchaser of the property is placed on full notice of all the rights and equities existing between the possessor and the "seller" of the property. Accordingly, a subsequent purchaser is not entitled to the rights of a bona fide purchaser when such purchaser fails to inquire as to the rights and equities the possessor may have, but rather, purchases subject to those rights and equities.

The issues of actual and constructive notice, possession as notice, the duty to inquire, and bona fide purchaser are issues I try to address further in Exercising Options To Buy, Rights Of Intervening Interests, Notice, Bona Fide Purchaser, Duty Of Inquiry, & Other Stuff.

For the next post in the series, see Equitable Mortgage Defense In Homeowner - Tenant Eviction - Part 4.

Go here for other posts on the equitable mortgage doctrine in California. California equitable mortgage valedictorian emdefense